Stiglitz lambasts Obama over handling of crisis

He may be something of a pariah on Wall Street thanks to his calls for a new tax on “upper income” Americans but, in his latest critique of the Obama administration’s handling of the financial crisis, Nobel prize-winning economist Joseph Stiglitz makes a great deal of sense.

Stiglitz—described as “perhaps the closest thing we have to John Maynard Keynes in both his theoretical outlook and his cogent kibitzing of policymakers” by the Bloomberg columnist James Pressley—has just published what may become the seminal work on the 2008 crash.

In Freefall: America, Free Markets, and the Sinking of the World Economy, Stiglitz berates Barack Obama for failing to come up with “an alternative vision of capitalism.” He warns that the US government’s decision to prop up a fundamentally flawed system with the equivalent of Elastoplasts is likely to lead to a crisis perhaps even more severe than the last one.

He believes attempts to resuscitate Wall Street have been dangerously flawed, largely because they were put together by representatives of the same cadre of bank bosses whose flawed thinking led to the multiple train wrecks of October 2008.

In an extract from Freefall published in the Huffington Post, Stiglitz writes: “the people who were responsible for the mess—as advocates of deregulation, as failed regulators, or as investment bankers—were put in charge of the repair. Perhaps not surprisingly, they all employed the same logic that had gotten the financial sector into trouble to get it out of it.

“The financial sector had engaged in highly leveraged, non-transparent transactions, many off-balance sheet; it had believed that one could create value by moving assets around and repackaging them.” Stiglitz seems stunned that the administration’s approach to sorting out the mess was based on the same “principles” of financial smoke and mirrors.

He writes: “Toxic assets were shifted from banks to the government—but that didn’t make them any less toxic. Off-balance sheet and non-transparent guarantees became a regular feature of the Treasury, FDIC and Federal Reserve. High leverage (open and hidden) became a feature of public institutions as well as private.”

He is also shocked that the Obama administration made “a deliberate attempt to circumvent Congress, because they knew that the American people would be reluctant to approve more largesse for those who had caused so much harm and behaved so badly.”

Stiglitz, author of the best-selling Globalization and its Discontents and a former chief economist at the World Bank and chief economic adviser to President Clinton, is also shocked that rather than seeking to break up “too-big-to-fail banks” Congress has actually strengthened them through the introduction of a concept he calls “too-big-to-be- financially-resolved.”

The economist, a professor at the University of Columbia, said that the Fed’s faith in simplistic rules prompted its discretionary interventions beyond those taken by any central bank in history and “without even the guidance of a clear set of principles.” He believes the moral hazard of providing a comprehensive safety net to failed institutions—but not to individuals—is likely to have dire consequences.

“Wall Street has used its power and money to buy deregulation, followed swiftly by the most generous bailout in the history of mankind.”

Despite all this, Stiglitz remains upbeat. In the Huffington Post excerpt he concludes by saying “there is still time to re-regulate, to correct the mistakes of the past.” He still believes the US still has a once-in-a-generation chance to build “a more efficient and a more stable economy” by readjusting the balance between markets and government. The question is: will Obama take it?